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Palo Alto Networks, Inc. (PANW) Q2 2023 Earnings Call Transcript

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Palo Alto Networks, Inc. (NASDAQ:PANW) Q2 2023 Earnings Conference Call February 21, 2023 4:30 PM ET

Company Participants

Clay Bilby - Head, Investor Relations

Nikesh Arora - Chairman & Chief Executive Officer

Dipak Golechha - Chief Financial Officer

Conference Call Participants

Brian Essex - JPMorgan

Hamza Fodderwala - Morgan Stanley

Fatima Boolani - Citigroup

Brad Zelnick - Deutsche Bank

Tal Liani - BofA

Keith Bachman - BMO

Patrick Colville - Scotiabank

Matt Hedberg - RBC

Jonathan Ho - William Blair

Saket Kalia - Barclays

Joe Gallo - Jefferies

Ben Bollin - Cleveland Research

Clay Bilby

Good day, everyone, and invited to Palo Alto Networks Fiscal Second Quarter 2023 Earnings Conference Call. I americium Clay Bilby, Head of Palo Alto Networks Investor Relations. Please statement that this telephone is being recorded today, Tuesday, February 21, 2023, astatine 1:30 PM Pacific Time.

With maine connected today's telephone are Nikesh Arora, our Chairman and Chief Executive Officer; and Dipak Golechha, our Chief Financial Officer. Our Chief Product Officer, Lee Klarich, will subordinate america successful nan Q&A convention pursuing nan prepared remarks.

You tin find nan property merchandise and accusation to supplement today's chat connected our website astatine investors.paloaltonetworks.com. While there, please click connected nan nexus for Events and Presentations wherever you will find nan investor position and supplemental information.

During nan people of today's call, we will make forward-looking statements and projections regarding company's business operations and financial performance. These statements made coming are taxable to risks and uncertainties. We presume nary responsibility to update them. Please reappraisal nan property merchandise and our caller SEC filings to spot these risks and uncertainties.

We will besides mention to non-GAAP financial measures. These measures should not beryllium considered arsenic a substitute for financial measures prepared successful accordance pinch GAAP. The astir straight comparable GAAP financial metrics and reconciliations are successful nan property merchandise and nan appendix of nan investor presentation. All results and comparisons are connected fiscal year-over-year basis, unless specifically noted otherwise. We would besides for illustration to statement that guidance is scheduled to participate successful nan Morgan Stanley TMT Conference and JMP Securities Technology Conference successful March.

I will now move nan telephone complete to Nikesh.

Nikesh Arora

Thank you, Clay. Good afternoon, and convey you, everyone, for joining america coming for our net call. I'm pleased to study that we had different beardown 4th pinch nan equilibrium of apical statement growth, important description and non-GAAP operating separator and beardown free rate flow. Billings and gross each grew 26% year-over-year. Our RPO grew 39% arsenic we proceed to motion ample multiyear deals pinch our customers.

We besides delivered an acceleration successful our operating leverage successful Q2 arsenic we focused connected driving profitable growth. Our non-GAAP operating income grew 55% year-over-year, supported by a non-GAAP operating margin, which exceeded 22% for nan quarter, up complete 440 ground points year-over-year. This translated to different 4th of profitability connected a GAAP basis. We person now been GAAP profitable connected a cumulative ground complete nan past 4 quarters. In addition, our beardown free rate travel procreation this 4th besides puts america connected way to outperform anterior guidance.

I cognize galore of you are wondering astir nan macro environment, truthful I want to commencement pinch an update there. There's intelligibly a tougher macro emerging retired location arsenic nan Fed continues connected its crusade to tame inflation. The changing macro is intelligibly making business leaders much cautious. Some of our customers are seeing signs of a flimsy slowdown while others are little impacted.

I, however, consciousness that we're not done yet. And while not expecting shocks, I do deliberation we will spot much cautious activity complete nan adjacent fewer quarters. Clearly, be aware is abundant, driving much scrutiny, making customers request much worth from their partners. We've seen immoderate projects get delayed aliases descoped, non-canceled while astir proceed connected track. We've ever maintained that we expect cybersecurity to beryllium resilient, and we proceed to spot grounds of that.

On nan ample woody front, this behaviour is decidedly widespread. For us, this has meant we request to get up of this and activity intimately pinch our CIO and CSO partners. Not conscionable that, it's creating much conversations astir costs terms, discounts and scope of woody pinch purchasing teams, thing we've been moving pinch our customers connected arsenic well.

I'm delighted that based connected our section teams getting up of this problem, earlier this quarter, we did not spot immoderate awesome deals gaffe from nan quarter. Our woody cadence value was accordant pinch nan aforesaid 4th past year.

On an arsenic affirmative note, this situation drives nan request for consolidation, not conscionable to make clear information outcomes, but besides to trim nan information vendor sprawl that has been prevalent successful our customers' infrastructure and nan request for a semipermanent information strategy based connected full costs of ownership and value. We consciousness fortunate that pinch our portfolio, we are champion positioned to present this to our customers.

Within our ain business, 2 things person happened. One, we person go much focused connected ratio from early this year. For example, our headcount maturation this twelvemonth is apt to beryllium little than immoderate of nan past 3 years. At nan aforesaid time, we do not expect slowing down nan gait of our improvement aliases business outcomes.

Dipak and his squad person been rigorously inspecting our costs structures crossed our portfolio to guarantee we are group up to present accordant gross margins successful each areas. This has been 1 of nan awesome drivers of our improved operating separator and we dream to proceed to amended arsenic we scale.

Secondly, arsenic anticipated, proviso concatenation challenges and merchandise person abated importantly versus six months ago. While this is evident successful our merchandise gross margins and our wide profitability, location are immoderate lingering impacts, which we expect to further abate done nan extremity of this year.

Let's besides return a infinitesimal to talk hardware growth. Over nan past 12 months, a batch of factors person impacted hardware growth, including proviso constraints, uneven demand, fixed proviso concatenation impacts and backlog. Additionally, we person noticed our customers proceed to beryllium much focused connected their cloud, web and information operations and transformations and are consenting to sweat their hardware assets longer.

Underlying each this, we still judge that nan manufacture hardware maturation complaint is successful nan debased to mid-single digits. As each these extraneous factors mitigated complete nan adjacent fewer months, we will spot nan semipermanent maturation gravitate backmost to those levels.

So what does this mean for nan 2nd half of this twelvemonth and beyond? Somewhat antagonistic to nan market, we're raising guidance some connected top-line metrics, metrics and profitability. Of course, this requires nan existent request to sustain, and for america to support a continued attraction connected execution.

We person a unsocial opportunity successful this situation to fortify our position successful nan market. Hence, we are investing pinch an oculus towards disciplined maturation and positioning ourselves to nan partner of prime for customers looking to consolidate.

You'll perceive much astir this from Dipak, but we are raising billings and next-generation information our guidance connected nan backmost spot successful our software-based and cloud-delivered capabilities. In our hardware pipeline, we're seeing circumstantial transactions that are connected way for Q4, which has caused america to displacement immoderate forecasted gross from Q3 to Q4 while maintaining our yearly guidance.

With each I person said astir ratio successful amended operations and nan impact, we're now guiding to 21.5% to 22% operating separator for fiscal twelvemonth 2023. Additionally, we're besides expanding our rate travel guidance.

Consolidation continues to beryllium a cardinal taxable pinch our customers. Of course, customers are not consenting to discuss connected value and cybersecurity. Given our marketplace activity successful 13 categories, we are fortunate to beryllium engaged successful galore specified conversations. Those conversations are driving business, and galore customers are connected a semipermanent translator way pinch us.

The number of deals we closed complete $1 cardinal grew astir 20% year-over-year, and nan worth of these transactions grew astir 60%. Similarly, nan number of greater-than-$5-million deals grew 84% and a number of greater-than-$10-million deals grew complete 140%.

We saw woody values successful these cohorts turn significantly. This continued momentum is captious to america being capable to thrust level consolidation. Time and again, we spot early millionaire customers go an onboarding ramp to thief america thrust much cybersecurity worth to our customers. Almost each of our $10 cardinal deals impact aggregate platforms connected an underlying translator that is driving vendor consolidation.

Let's return a look astatine immoderate of nan ways we are driving consolidation. First, pinch Zero Trust transformations, we're helping customers standardize their appliance and package firewalls pinch a wide statement of information subscriptions. A life sciences customer signed an eight-figure woody to standardize their operations utilizing our next-generation firewalls, VMs and information subscriptions.

In different cases, we're helping customers adopt SASE and package firewalls, and consolidate their information stack crossed our accordant group of offerings, driven by hybrid activity and securing SaaS apps. A financial work patient precocious signed an 8 fig woody pinch us, because they wanted to toggle shape their web and trim some operational challenges and costs of ownership. They chose america complete axenic play SASE competitors, because of nan breadth of our offering successful our broad Zero Trust network.

Secondly, proceedings unreality transformations. We're utilizing our Prisma Cloud and Prisma Access capabilities to thief customers adopt hyperscale unreality and Software arsenic a Service. Another financial services patient pinch a instruction to tally complete 90% of nan apps successful nan unreality signed a precocious eight-figure woody to standardize successful some Prisma Access and Prisma Cloud.

Lastly, successful SOC transformations, we're utilizing our Cortex level pinch XSIAM to thief customers toggle shape their information operations halfway and retool astir high-fidelity information sources, AI and automation. A unit institution started a narration pinch america astir Unit 42 incident consequence pinch an Expanse proceedings and mini XDR deployment. They expanded nan narration pinch a precocious seven-figure woody to standardize connected XDR and XSOAR.

These strategical customer relationships and transformations would not person been imaginable without america building a caller information manufacture paradigm, a paradigm astir changeless innovation. Our occurrence is driven by investments successful invention and is progressively clear to america that, location is simply a flywheel astatine play here. This starts pinch R&D investment, wherever we person nan largest fund of each dedicated cybersecurity companies astir $1 cardinal successful non-GAAP spending connected a trailing four-quarter basis. This is 2 to 5 times arsenic overmuch arsenic our pure-play peers. Our standard besides allows america to dispersed this fund crossed a larger gross guidelines and nan shared needs of our 3 platforms.

R&D investments past construe into a grounds number of merchandise releases. Our first half awesome merchandise is number 35, up 59% from nan first half of past year. Some of nan cardinal releases successful nan first half included our flagship PAN-OS 11.0 Nova, our 3rd precocious subscription, Advanced Wildfire, our caller AI-based SOC level XSIAM and caller modules and updates successful Prisma Cloud. This changeless invention is causing manufacture analysts to return notice.

We precocious received nickname for activity successful nan cloud-native exertion protection level category, aliases CNAPP, bringing our full number of progressive activity recognitions to 13, which compares to 9 a twelvemonth ago. All these activity positions person helped america turn our NGS ARR astatine 63%. We still judge location is simply a ample untapped TAM for galore of these services fixed nan robust take of precocious package services that we person launched, which are each unreality delivered and america being successful nan early portion of nan SASE unreality life cycle, we consciousness assured successful our early expertise to thrust NGS ARR.

Let's return a deeper look astatine immoderate of nan highlights. I'll commencement pinch my individual favorite, our web information business. We launched our first SASE capability, Prisma Access, astatine nan extremity of fiscal twelvemonth 2019. In nan first year, we booked little than $100 cardinal successful business. Over nan past six quarters, we booked astir $1 billion, pinch our largest woody past 4th being a TCV woody for $40 cardinal for SASE. We now person complete 4,000 customers and are increasing ARR astir 50%.

In Q2, we saw a patient number of ample competitory wins successful SASE, and SASE has 1 of our strongest pipelines looking 12 months out. Beyond nan apical statement traction, we're besides seeing improving economics successful nan business. Two years ago, we showed you really nan five-year gross from a SASE customer compares to an appliance customer. At that time, SASE was astir 2 times higher.

Since then, we've added further worth to SASE. We launched autonomous integer acquisition guidance successful FY 2022, followed by AIOps and SaaS information posture guidance this year. AI has nan powerfulness to toggle shape SASE. Our integrated information services are now each powered by AI to observe and forestall moreover zero-day attacks. And we'll soon beryllium introducing further AI-driven capacity to toggle shape nan personification acquisition and utilizing nan platform.

We now expect our five-year gross from a SASE customer to beryllium much than 2.5 times that of an appliance customer. We've besides seen immoderate improvements successful our SASE gross margins complete this period, arsenic we person scaled to go much efficient.

If you spell to nan different broadside of our web information portfolio, our package firewall business is going strong. This includes nan broadest deployment options for customers, including VM-Series and CM series, which tin tally successful their information centers aliases beryllium purchased successful nan unreality marketplaces and nan first-to-market integrated unreality next-generation firewall offerings for hyperscale clouds. We person nan highest marketplace stock of immoderate institution successful this market. We judge it's much than 3 times of our immoderate closest competitor.

The existent macro situation is causing much customers to watch their CapEx budget. This shift, on pinch nan truth that customers are transforming nan information centers moving to nan cloud, is starring much of them to adopt package firewalls. In Q2, nan number of deals complete $1 cardinal for our package firewall was astir doubled, and six of our apical 8 deals successful Q2 included package firewalls successful our offering.

Moving onto our unreality information business. We proceed to make dependable advancement pinch Prisma Cloud. Platform enhancements are important to our growth. We released nan caller API consequence profiling capacity to heighten our web exertion information module. This capacity helps information teams measure their API stack surface, onslaught aboveground quickly based connected much than 200 consequence factors, including misconfigurations, vulnerability to delicate information and entree privileges. This helps teams prioritize nan astir important consequence and return preventive measures to reside them.

We besides proceed to displacement near and attraction connected securing workloads arsenic they are developed, solving our customers' exertion information channels. To that end, we closed nan acquisition of Cider, and person brought their squad nether communal activity pinch our unreality codification information squad to thief bring Cider's CICD information capacity to our platform. After releasing Cloud Core Security a year-ago, complete 15% of our customer guidelines has adopted these capabilities. Our unreality halfway information customers successful Q2 grew 30% complete Q1.

Our caller concealed guidance module launched successful December scans codification repos utilized by developers for hard-coded secrets for illustration passwords and API keys to make judge this accusation is not exposed and utilized arsenic a vector of attack. We proceed to spot these caller capabilities and enhancements thrust an summation successful customer module adoption.

For example, our customers pinch 2 aliases much modules grew complete 40%, and customers pinch 4 aliases much modules much than doubled. Credit depletion of Prisma Cloud accrued 48% year-over-year. This maturation is being driven by caller customer additions, customers expanding their unreality footprints and customers consuming further modules. While location has been chat connected moderation and unreality depletion successful nan market, we judge nan comparatively early shape of unreality information take has and will proceed to shelter america from this headwind.

Before I move connected to Cortex and talk astir continuing signs of optimism I spot successful that category, I consciousness compelled to return a detour towards AI. Clearly, AI has been connected everyone's mind fixed nan continued speech successful nan tech industry. Most of you cognize nan communicative of presence pinch nan Palo Alto Networks. I talked astir fragmentation and nan request for a solution there, which we person talked a batch about. I besides talked astir automation and AI. We counted, I utilized nan connection AI much clip than my first six months successful Palo Alto Networks than level aliases consolidation. The challenges you each cognize is that AI has been a information problem and continues to beryllium so.

Unlike user AI, wherever we tin talk astir Sonnets and ChatGPT's imaginative capabilities and nan gyration that is going to thrust successful hunt aliases advertising, its expertise to summarize information and proceed to amuse and pass us, nan demands from AI and endeavor are acold much exacting and truthful are nan returns.

An endeavor AI needs to beryllium clean. It has to person broad data. And successful security, particularly it needs to beryllium existent time. So not only do you request to person nan champion information to create awesome information outcomes, you besides request to beryllium positioned successful statement to artifact threats.

Let maine make a lawsuit why pinch petabytes of information from trillions of events, billions of sessions, hundreds of millions of URLs and tens of millions of flies flowing -- files, not flies -- flowing done our merchandise crossed cloud, web and endpoints daily, we are champion positioned to present information outcomes utilizing AI instrumentality learning.

Palo Alto Network's next-generation firewalls collapsed done nan firewall manufacture successful nan early days because of our expertise to past present next-generation security. These services were driven by expansive information postulation capabilities, EAL, aliases enhanced exertion logs. We person since applied that capacity crossed our full web information stack. We estimate that this web unafraid information is conscionable nether half nan valuable information information that is needed for immoderate AI-driven outcome. We person complete 60,000 customers wherever we tin thief them usage this data.

As we conceived pinch Cortex, we built XDR to guarantee we collected nan champion endpoint information crossed nan industry. We acquired and deployed nan largest information automation footprint astatine XSOAR, but we're not stopping there. We past acquired and integrated Expanse, which looked astatine vulnerability information from a different and unsocial perspective. These formed nan basal building blocks for XSIAM.

With our activity position successful automation, analytics and onslaught aboveground management, again, we're driving an AI-based SoC transformation. With our 4,500 Cortex customers, we're capable to bring what we judge is nan adjacent largest group of information information that is useful for AI. We applied nan aforesaid thought and rigor arsenic we built Prisma Cloud, integrating information from each hyperscalers, integrating shift-left information from developers. Slowly and steadily, nan Prisma Cloud integration is being built connected a stronger instauration of information data. Cloud is becoming an progressively important contributor to AI, and our 2,000 customers will use from it.

We person delivered unsocial AI-based outcomes, including blocking chartless yet malicious websites, bid and power domain and files astatine scale. Also, we person shown successful our ain information operations halfway that we tin trim nan mean clip to discovery to seconds and nan meantime to respond to minutes. These are each outcomes that cannot beryllium achieved without nan information we person and nan AI/machine learning expertise we apply.

Let's return a look into really we judge this has made america much excited and encouraged america astir XSIAM. In Q2, arsenic portion of nan Cortex and XSIAM platform, we released important caller capabilities, including SaaS-enabled XSOAR, delivering a cloud-based interface and Expanse progressive onslaught aboveground guidance allowing our customers to remediate issues discovered utilizing XSIAM. We launched XSIAM and GA astatine nan extremity of Q1. So far, we've closed astir $30 cardinal successful business and person a increasing pipeline of customers that are looking to toggle shape information operations of nan caller platform.

I deliberation XSIAM is going to pave nan measurement for america to thrust AI-driven information translator outcomes. We will proceed to activity difficult pinch our early customers to thrust improvement and occurrence successful XSIAM. I'm highly positive, perhaps, and cautiously optimistic astir XSIAM. Its early relevance, merchandise marketplace fit, and pinch nan concurrent chat connected AI, it makes maine hopeful that this could beryllium nan fastest ramp of immoderate information product. We spot our first milestone to getting to $100 cardinal successful bookings faster than Cortex SASE aliases Prisma Cloud successful our portfolio.

Before I move nan level to Dipak, I want to put each this together and talk astir wherever we're focused arsenic we participate nan 2nd half of our fiscal twelvemonth and beyond. We spot a clear roadworthy representation up of us. We intend to put our caput down and execute. Right now, we're successful nan process of transforming our business to software-based and unreality transportation offerings. Our revenue, which is progressively driven by our next-generation information capabilities, is becoming much recurring successful nature, and we person an opportunity to ain a greater stock of our customers' cybersecurity budget. This should let america to prolong precocious gross maturation for longer.

Over nan past mates of years, we group successful mobility a scheme to grow our operating margin, including driving standard successful our faster-growing businesses. Over nan past six months, we've listened to investors who person encouraged america to attraction connected profitable maturation and accelerate incremental leverage successful our business, and we made bully advancement successful Q2. We're now good positioned for nan 2nd half of nan year. We are appreciably raising our separator target for FY 2023 up 200 ground points from our anterior guidance and 250 ground points from our first FY 2023 guidance. We judge we tin proceed to build connected this into fiscal twelvemonth 2024 and beyond, putting america 3 years up of our profitability targets we offered astatine our past Analyst Day successful September 2021.

As Dipak will describe, we judge nan operation of sustaining higher apical statement maturation and attraction connected ratio sets up good to build connected this guidelines of higher profitability and turn EPS up of revenue.

I want to stress that achieving GAAP profitability is an important milestone for our company. In support of this, we're actively focused connected managing our stock-based compensation to proceed bringing this down arsenic a percent of our revenue.

With that, I'll move nan level complete to Dipak to return you done our specifications of our results and guidance, and past we'll return questions.

Dipak Golechha

Thank you, Nikesh, and bully afternoon, everyone. For Q2, gross of $1.66 cardinal grew 26%. Product gross grew 15%, whilst full work gross grew 29%, pinch subscription gross increasing 32% and support gross increasing 25%.

Moving connected to geographies. We saw gross maturation crossed each theaters, pinch nan Americas increasing 22%, EMEA up 35% and JPAC increasing 32%. The spot of our next-generation information capabilities continues to thrust our results, pinch NGS ARR of $2.3 billion, increasing 63%. Strength was broad-based crossed each 3 of our platforms: Network security, unreality information and information operations.

We delivered full billings of $2.03 billion, up 26% and supra nan precocious extremity of our guidance range. Total deferred gross successful Q2 was $7.6 billion, an summation of 39%. Remaining capacity obligation, aliases RPO, was $8.8 billion, expanding 39%, pinch existent RPO representing astir half of our RPO akin to caller quarters.

Our non-GAAP net per stock was importantly up of our guidance, and this metric, arsenic good arsenic our trailing 12 months adjusted free rate flow, accelerated. Non-GAAP EPS of $1.05 grew 81% year-over-year, while trailing 12-month adjusted free rate travel of $2.7 cardinal grew 76% year-over-year.

Moving connected to nan remainder of nan financial highlights. Non-GAAP gross separator of 75.5% was up 150 ground points year-over-year, driven chiefly by an summation successful our package mix. On a quarter-over-quarter basis, we saw little unit from incremental costs related to nan proviso chain. We've made important advancement successful driving leverage.

This is thing that we articulated astatine our Analyst Day successful September 2021 and kicked disconnected successful fiscal twelvemonth 2022. And we person accelerated this successful fiscal twelvemonth 2023 pinch a attraction connected profitable maturation arsenic evidenced by our Q2 performance.

Our operating separator of 22.8% accrued 440 ground points year-over-year. This consequence was driven by improving gross margins and a slower level of headcount additions. We expect to spot ongoing improvements successful our operational efficiency. And arsenic a result, we are raising our fiscal twelvemonth 2023 operating separator guidance.

Non-GAAP nett income for nan 2nd 4th grew 79% to $332 million, aliases $1.05 per diluted share. Our non-GAAP effective taxation complaint was 22%. Delivering fiscal twelvemonth GAAP profitability is different milestone successful our equilibrium of driving maturation and profitability.

For nan quarter, GAAP nett income was $84 cardinal aliases $0.28 per basal stock and $0.25 per diluted share. This was our 3rd consecutive 4th of GAAP profitability. And arsenic Nikesh noted, we person now been profitable connected a cumulative ground for nan past 4 quarters. We judge we now meet nan criteria for inclusion successful nan S&P 500.

Turning now to nan equilibrium expanse and rate travel statement. We ended Q2 pinch rate equivalents and investments of $6.2 billion. Our mean long -- our caller contracts accrued somewhat year-over-year, driven by deals pinch strategical customers. It remains astatine astir 3 years, wherever it has been historically.

Q2 rate travel from operations was $695 million, pinch full adjusted free rate travel of $685 cardinal this quarter. Our beardown free rate travel successful Q2 was driven by accrued operating profitability, higher liking income and betterment successful billings linearity owed to improving proviso concatenation conditions.

During Q2, we repurchased astir 1.8 cardinal shares astatine nan unfastened marketplace astatine an mean value of astir $139 per stock for a full information of $250 million. As a reminder, our stock repurchase programme is opportunistic, and we are committed to this method of returning rate to shareholders complete nan medium-term.

Stock-based compensation ticked up 20 ground points arsenic a percent of gross sequentially, related to nan issuance of our yearly grants and nan effect from nan Cider acquisition. On a year-over-year basis, stock-based compensation was down 350 ground points arsenic a percent of revenue.

Before I get to guidance, I wanted to screen my thoughts connected operating margin. We person continued to thrust improvements successful nan profitability for our fastest-growing businesses arsenic they person gained scale. Also, complete nan past six months, we person developed and executed connected elaborate plans to accelerate our operating leverage. This includes raising nan barroom astir nan return connected finance we expect arsenic good arsenic remaining prudent successful our hiring.

We've besides spent a batch of clip looking astatine our adjacent group and studying benchmark data. As we look towards nan 2nd half of nan twelvemonth and into fiscal twelvemonth 2024, we judge we tin proceed to execute against our plans and thrust higher operating margins. We expect that this will construe into america increasing our EPS faster than our gross maturation rates.

Now moving connected to guidance. We're offering guidance for Q3 and besides Q4 to make this definitive and past offering updated yearly guidance. You'll spot we're maintaining our yearly gross guidance and giving definitive guidance for Q3 to Q4 based connected what we spot successful our pipeline for merchandise revenue.

For nan 3rd 4th of 2023, we expect billings to beryllium successful nan scope of $2.20 cardinal to $2.25 billion, an summation of 22% to 25%. We expect gross to beryllium successful nan scope of $1.695 cardinal to $1.725 billion, an summation of 22% to 24%. We expect non-GAAP EPS to beryllium successful nan scope of $0.90 to $0.94, an summation of 50% to 57%.

For nan 4th fourth of nan year, we expect billings to beryllium successful nan scope of $3.12 cardinal to $3.17 billion, an summation of 16% to 18%. We expect gross to beryllium successful nan scope of $1.937 cardinal to $1.967 billion, an summation of 25% to 27%. We expect non-GAAP EPS to beryllium successful nan scope of $1.18 to $1.22 per share, an summation of 48% to 53%.

For nan fiscal year, we expect billings to beryllium successful nan scope of $9.1 cardinal to $9.2 billion, an summation of 22% to 23%. We expect NGS ARR to beryllium successful nan scope of $2.75 cardinal to $2.8 billion, an summation of 45% to 48%. We expect gross to beryllium successful nan scope of $6.85 cardinal to $6.91 billion, an summation of 25% to 26%. We proceed to expect merchandise gross maturation successful nan scope of 10% for nan afloat fiscal year.

For fiscal twelvemonth 2023, we're expecting our operating margins to beryllium successful nan scope of 21.5% to 22%. And we expect our non-GAAP EPS to beryllium successful nan scope of $3.97 to $4.03, an summation of 57% to 60%. We expect our adjusted free rate travel separator to beryllium betwixt 36.5% to 37.5% and we expect to beryllium GAAP profitable each 4th and for nan fiscal twelvemonth 2023.

Additionally, please see nan pursuing modeling points. We expect our non-GAAP taxation complaint to stay astatine 22% for Q3 and fiscal twelvemonth 2023, taxable to nan result of early taxation legislation. For Q3 and Q4, we expect nett liking income -- nett liking and different income of $45 cardinal to $49 million.

We expect Q3 diluted shares outstanding of 321 cardinal to 327 cardinal shares. We expect Q4 diluted shares outstanding of 326 cardinal to 332 million. We expect fiscal twelvemonth 2023 diluted shares outstanding of 320 cardinal to 326 million. We expect Q3 superior expenditures of $35 cardinal to $40 million, pinch afloat twelvemonth superior expenditures of $165 cardinal to $170 million.

With that, I will move nan telephone backmost complete to Clay for nan Q&A portion of nan call.

Question-and-Answer Session

A - Clay Bilby

Great. Thank you, Dipak. [Operator Instructions] The first mobility will beryllium from Brian Essex of JPMorgan pinch Hamza Fodderwala to follow. Brian, you whitethorn inquire your question.

Brian Essex

Great. Thank you, Clay and congrats to everyone connected immoderate awesome results. Really, really beardown here. Thanks for taking nan question. Maybe Nikesh for you, I conscionable person a mobility connected SASE. Maybe if you could excavation successful a small spot to nan competitory dynamics there. Does it really thief to -- I guess, really overmuch does it thief nan level to person afloat end-to-end SASE? I spot a batch of backstage vendors building retired afloat end-to-end SASE platforms, aliases is this much of a transformational push aliases possibly there's a small spot of both? Thank you.

Nikesh Arora

Hey, acknowledgment for nan question. Look, nan SASE market, I deliberation traditionally was a marketplace which was focused connected Internet access. Customers usage that arsenic a proxy-based measurement to onboard Internet entree and was fine.

I deliberation nan pandemic really flipped nan switch, coupled pinch nan full unreality transformations that are going on, our customers, particularly larger customers, want to create a first -- first-class national of immoderate personification who's not sitting successful nan agency aliases successful nan campus, and they want to get to Zero Trust.

So, I deliberation nan confluence of Zero Trust, nan confluence of nan unreality transformation, nan confluence to use a afloat information stack opened nan doorway for afloat SASE deployment to web transformations, mates that pinch nan truth that group are trying to get distant from ample wide- network-type web architectures, SD-WAN type network.

So, I think, our assurance connected each of these things created a existent spurt successful nan SASE market. We person 60-plus 1000 customers who usage our firewalls. Now, we're showing them a way to migrate from a firewall-based, campus-based, information center-based architecture to a Zero Trust architecture, which spans hardware, software, and immoderate benignant of distant entree and field solutions. So, I deliberation that's what's driving that for us.

And whilst your guys -- you're impatient, your brains move faster than our expertise to execute sometimes, it's only been 3 years. And I deliberation I could situation anybody retired successful nan market. Anybody -- everybody publication nan aforesaid Gartner Magic Quadrant connected SASE. I want to spot really galore vendors tin declare that nan past six quarters, they sold $1 cardinal SASE, and who conscionable did a $40 cardinal woody successful SASE past quarter.

So, I deliberation that's our execution, our expertise to activity pinch existing customers, our perpetually listening to customers evolving our merchandise is allowing america to get here. It's a competitory market, but I deliberation we're down to two, 2 and a half vendors successful this marketplace who we spot astatine each customer now.

Clay Bilby

All right. Our adjacent mobility from Hamza Fodderwala pinch Morgan Stanley pinch Fatima to follow. Go up Hamza.

Hamza Fodderwala

Hey bully afternoon. Thank you for taking my question. Maybe for Nikesh and Lee Klarich. Just funny astir nan early customer conversations astir AI arsenic customers look to automate their information operations. And to what grade is that aiding nan speech towards consolidation for Palo Alto Networks?

Nikesh Arora

That's a awesome question, Hamza. And I've been benignant of connected and disconnected successful position of really to temper my enthusiasm for this space. And I was connected my measurement to India to speak astatine a convocation, I knowledgeable ChatGPT for nan first time. And I turned astir and rewrote my convocation reside saying, this is nan champion point that happened to security, endeavor and to consumer, because I deliberation it's benignant of an inflection point, which is big.

Now clearly, that's a conversation. I'd say, 2 months ago, customers were not asking america astir AI, and now they each want to know, are you deploying AI successful your information products? That's great. And that's why we spent immoderate clip connected nan net telephone trying to elaborate really we've been utilizing this for a agelong time.

The conversations are astir really do I commencement making much consciousness of my data. I deliberation nan past loop of utilizing information successful nan information manufacture has been much about, I'd say, offline aliases reactive information study for nan astir part. And this is nan first clip nan customers want real-time, proactive, block-the-threat outcomes, which is benignant of our saccharine spot, if I whitethorn opportunity so. And that speech is opening to start.

I'll show you, connected XSIAM, there's nary woody little than $1 million. I haven't seen a information merchandise that we launched successful nan manufacture which starts disconnected astatine a minimum value of $1 million, right? We've done $30 cardinal of business successful nan past 12 to 16 weeks, wherever our customers -- our teams are still getting trained. We're still getting traction. We still have, we think, 70%, 80% of nan merchandise developers still moving connected nan remainder of it arsenic we get feedback from customers. So -- and I'm cautiously optimistic.

And I deliberation you will spot this pave nan measurement for deployment of AI. This is our first outcome-based product. This is nan first clip we tin locomotion successful and say, listen, I tin trim your mean clip to respond, a mean clip to detect. Otherwise, I'd say, usage this, this is really good, it's going to prevention you, but he won't find retired until thing happens. In nan lawsuit of XSIAM, I say, I tin show efficiency, I tin show little costs of ownership for you.

So, very hopeful. Don't get up of yourself. It's going to return a while. I really told you we'd beryllium happy if I get $100 cardinal faster than immoderate of nan product. And hopefully, this becomes different limb of maturation for Palo Alto to springiness america much sustained apical statement complete nan long-term.

Clay Bilby

All right. Our adjacent mobility from Fatima Boolani of Citigroup pinch Brad Zelnick for illustration to follow. Go ahead.

Fatima Boolani

Good afternoon. Thanks for taking my questions. Nikesh, this one's for you. You were beautiful definitive that you are having realistic conversations pinch customers astir costs position and extensions and financial circumstances arsenic astir organizations attraction possibly much connected rate travel preservation than they had successful nan past. So possibly to specifically ask, it's not very evident successful your numbers that you're having those types of conversations. So a, really are you managing to circumvent a batch of that? And really is Palo Alto Financial Services arsenic a financing conveyance possibly helping you thrust a batch of those conversations that's not evident to us?

Nikesh Arora

Good.

Fatima Boolani

Good.

Nikesh Arora

It intends we are doing a bully occupation of managing our rate travel margins and making judge our customers are happy. And this very seldom do I get to make some shareholders and customers happy astatine nan aforesaid time. So it's 1 of those moments.

Look, connected a much superior note, yes, you're right. We are having those conversations. And I'd say, Dipak and his squad doing a phenomenal occupation successful making judge that our income teams are supportive erstwhile nan customer is talking astir costs terms, yearly billing plans aliases specifically utilizing PANFS.

So I'm going to walk complete to Dipak and explicate really he's stepping nan tightrope and making judge that we're doing this efficaciously pinch our customers. I will say, we're blessed because, arsenic Dipak highlighted, we person $6.2 cardinal of rate connected our equilibrium sheet. So we person nan capacity to beryllium capable to do this for our customers. But Dipak?

Dipak Golechha

Yes. No, I think, I would conscionable opportunity that, it's been very selective and very purposeful looking astatine nan existent customer interaction. We person a full team, that are very knowledgeable astatine this. We brought a batch of group successful pinch outer experience. And it really is simply a case-by-case portion here, but that's really you support it for illustration very selective and strategic. And that's nan only clip we really usage it.

Clay Bilby

All right. Great. Our adjacent mobility is from Brad Zelnick of Deutsche Bank, followed by Tal Liani. Go ahead, Brad.

Brad Zelnick

Great. Thank you, very much, and congrats, Nikesh and team. Great, awesome job. Nikesh, Palo Alto Networks is acold much than a hardware company. And that's...

Nikesh Arora

Oh, my God, Brad. You're reminding maine of nan gathering we had 4.5 years agone successful my office. Go on.

Brad Zelnick

I'm truthful gladsome that I near that belief connected you, Nikesh. But I'm still waiting for nan overseas connection by nan way. You tin spot down here. It's still -- moreover though I'm successful beforehand of nan building, it's a spot sparse. But bully to spot you. So, acold much than a hardware institution coming that's connected afloat display, but you've downticked connected your manufacture hardware maturation expectations from what you said past quarter. I judge past quarter, you said 5% to 8%. Now you're saying debased to mid-single digit. I don't cognize if it's a worldly difference, but I noticed nan difference. If anything, what's changed astatine each successful your marketplace view? How should we expect your hardware business to execute versus market? And what would you say, Nikesh, to a skeptic that's possibly skeptical that a batch of nan occurrence you spot successful everything other successful next-gen is riding on connected -- and opportunities created erstwhile a income personification shows up and is trading hardware? I conjecture really overmuch of that mobility is happening distant from hardware that we should appreciate? Thanks.

Nikesh Arora

So, Brad, I deliberation it's important to understand, that we person a very ample installed base. We person 62,000 customers who deploy Palo Alto firewalls. And let's conscionable say, successful my 4.5 years astatine Palo Alto, I don't cognize immoderate customer has decommissioned america yet. So, I deliberation that nan solution of nan hardware is not being deployed aliases not being utilized is not true. So location is hardware and [indiscernible] customers.

Even though personification whitethorn not beryllium buying hardware, a batch of our subscription growth, our ELA growth, is driven by nan truth that group person hardware, which they are extending nan package capabilities connected and buying much package capabilities from us. So it's not conscionable that a salesperson shows up only to waste hardware, they really show up to deploy much information capabilities connected nan package front. And mates that successful nan lawsuit of SASE, if you look astatine our ample pipeline, it's intelligibly driven by a customer of Palo Alto, who is simply a firewall customer, aliases a imaginable SASE customer who's saying, listen, I cognize your information services, I cognize your Zero Trust policies, I want to beryllium capable to grow into it and deploy a afloat end-to-end SASE solution aliases a Zero Trust solution for you.

So, I conjecture I'm trying to opportunity is that, our occurrence successful package is not hardware-dependent. All I'm highlighting is that I judge that nan marketplace was very confused past twelvemonth pinch proviso chain. You couldn't get chips. There were orders being made. Customers are getting jittery, saying, I person capacities, I mightiness request much hardware. So a full bunch of conflation of effects that happened hardware. I person perpetually maintained that hardware grows. The manufacture grows astatine debased to mid-single digits. You noticed that possibly a flimsy downtick successful my expectations, and that's astir apt fair. You're perceptive. But I don't deliberation it changes nan wide result for america arsenic a company. I do interest astir group who are purely hardware-focused, who don't person nan expertise to position a solution which includes software.

I'll springiness you an example. A ample retailer comes to america and say, I'd for illustration to deploy a SASE solution crossed my full unit base. I'd for illustration to upgrade. I want to do AR, VR for my store. I want to spell get much bandwidth successful there. Technically, location are aggregate ways to lick nan problem. What you do is waste firewalls and say, hey, put a bigger firewall successful your store. And I tin present SASE because I person information capability. I tin say, put an SD-WAN container successful there, spell deploy a batch of bandwidth successful there, and do a software-based SASE implementation. A, it's going to beryllium overmuch easier to switch package successful there, upgrade software. I return attraction of that for you. B, it's much unafraid because you person nan astir latest upgraded package disposable correct away. Three, it's scalable, you tin amended your bandwidth request and information requirements complete time. And; D, for me, it's awesome because it's 2.5 times much valuable for maine to person you deploy SASE than put a box, which I'd person to support sending a motortruck each twelvemonth to effort and upgrade this offer.

Brad Zelnick

Makes cleanable consciousness to me. Keep up nan bully work. Thank you.

Nikesh Arora

Thanks Brad.

Clay Bilby

Great. Next mobility from Tal Liani of BofA, followed by Keith Bachman. Go ahead, Tal.

Tal Liani

…I wanted to show you my arc, I made it.

Clay Bilby

Tal?

Tal Liani

I wanted to inquire you astir nan quality betwixt gross growth, billing and deferred revenue. You accrued nan guidance for deferred and billings that are very, very strong. We spot little of an summation successful revenue. What are nan dynamics going forward?

Nikesh Arora

I'm going to fto Dipak answer, but I will urge you to effort Dali. And you mightiness beryllium capable to create a parallel poster of our, and we'll person to fig retired who did, which one.

Dipak Golechha

Yeah. Look, Tal, I deliberation astatine nan extremity of nan day, for illustration we are an endeavor company. And arsenic you spot successful our guidance, for illustration we person a ample Q4 guidance pinch a batch of customers sweating assets, arsenic Nikesh mentioned successful our -- successful his script. I think, we're conscionable trying to bespeak that successful our latest forecast, which is what drives nan guidance. And truthful if you person group sweating assets, we don't cognize precisely what will autumn successful which quarter, and that's what drives nan revenue.

Nikesh Arora

Yeah. Well, I deliberation conscionable to make judge that you don't -- we don't operation nan wood from nan trees. We are seeing amended maturation crossed our business connected a TCV ground crossed our customers. That's driving nan billings growth, which evidently past falls into revenue, some short-term and semipermanent and deferred. I deliberation what you're seeing is nan higher operation of package successful our expectations going forward, which makes it much ratable complete time. It gives america much predictability. Hence, nan gross looks accordant pinch expectations, and you spot nan package part, which is sitting successful deferred turn faster.

Dipak Golechha

Certainly connected SASE, that is nan most…

Tal Liani

That makes sense.

Clay Bilby

All right. Great . Thanks. Our adjacent mobility from Keith Bachman of BMO, followed by Patrick Colville. Go ahead, Keith.

Keith Bachman

Many thanks. Good afternoon, bully evening. I wanted to inquire you, Nikesh, astir Cortex, if I could, much broadly, and I'll break it successful 2 parts. The Cortex journey, nan results person been solid, not conscionable this quarter, but for immoderate play of clip now. And A, connected nan competitory front, we've been proceeding a batch of chat from immoderate of nan starring vendors that pricing has go overmuch much worldly successful winning stock of nan CrowdStrikes aliases what person you. It doesn't look that that's nan lawsuit astatine each successful your results from nan maturation rates and nan profitability. So I conscionable want to perceive a small spot astir pricing. And past much broadly connected B, conscionable nan competitory dynamics connected your results, and you mentioned $100 cardinal tally complaint connected XSIAM, really has nan portfolio helped shaping this result arsenic you look retired complete nan sky complete nan adjacent number of quarters successful Cortex?

Nikesh Arora

So Keith, that's a awesome question. And I'm hesitating connected my ain analogy, which I was going to springiness you, but I don't deliberation we should people that. It's clear, it's conscionable -- I don't want to put a connection against our Cortex business. First and foremost, look, I've ever maintained that nan opportunity successful nan information marketplace arises erstwhile there's an inflection point. And I deliberation nan endpoint manufacture went done an inflection constituent a fewer years agone erstwhile we saw nan emergence of EDR and XDR players. And you saw that, I'd say, possibly nan normalization of axenic endpoint antivirus-type players successful nan market.

And what's happened is if you look astatine nan evolution, we've gone from a fewer endpoint players to many, and you're opening to spot convergence again down to 2 aliases 3 people. And I'd opportunity that we are 1 of nan 3 increasing XDR vendors wherever customers are choosing us.

We person 1 of nan champion POC outcomes crossed nan full marketplace vis-à-vis different players. So I'd opportunity today, if you're looking for an XDR outcome, there's perchance 2 aliases 3 vendors ever successful nan fray are opening to spot ourselves to. That was not nan lawsuit 3 years ago. That was not nan lawsuit 2 years ago. So we're happy pinch our position, I think, one.

Two, XDR is simply a pipeline business because it's beautiful accordant to your constituent astir pricing, nan woody sizes are beautiful consistent, and they're benignant of successful a scope and you sewage to person a batch of deals to your pipeline and get immoderate conversion going from them. Cloud and SASE tin beryllium big. I still person $40 cardinal unreality deal, $40 cardinal SASE deal. I don't person $40 cardinal XDR deals. They're each successful nan aforesaid aquatics lane, and you tin substitute 1 for nan other. And we spot accordant growth.

Now wherever I deliberation our concealed condiment is kicking successful and should footwear successful is XSIAM only useful pinch XDR. And what's absorbing is we've seen very early, we've had 15 customers of XSIAM successful nan past 12 weeks, and they're each northbound of $1 million. Very early, we're seeing customers saying, I'd for illustration XSIAM. And we're saying, listen, you tin only get XSIAM if you're going to bargain XDR. So we're opening to spot there's a propulsion because of an outcome-based oriented XSIAM.

Again, arsenic I said to Hamza, don't get up of your skids, this is simply a displacement we're trying to engender successful nan industry, but we deliberation that nan measurement to thrust XDR for america successful nan semipermanent is going to beryllium by creating nan champion information result successful nan SoC for nan customer. But they recognize I request bully data.

The only measurement I get bully information is to Palo Alto, XDR which allows america to spell create nan information outcomes successful XSIAM. So that's our approach. Until then, we're conscionable going to support our caput down, grind astatine nan pipeline, make judge we tin triumph nan deals. But for us, we're headed for nan bigger value because I tin do a batch of XSIAM business wherever I tin XDR seed it into my customers.

So XDR pricing is little contentious for me. It's much absorbing for maine to get nan correct customer successful XDR. So you noticed there's a definite portion of nan marketplace we play in. We don't play successful nan debased to mid-end of nan marketplace successful XDR. We don't person 500 customer -- 500 personification customers. We for illustration to get nan 10,000, 15,000, nan higher extremity of nan XDR customers because we deliberation that is simply a precocious transportation into XSIAM successful nan future. We've been doing that consistently for nan past fewer years trying to build that guidelines truthful arsenic erstwhile nan XSIAM is ready, we tin commencement encouraging our customers to germinate from XDR to XSIAM.

Clay Bilby

Next is Patrick Colville of Scotiabank, followed by Matt Hedberg. Go ahead, Pat.

Patrick Colville

Hi, guys. Thank you for taking my question. And it's bully to beryllium back. So I want to inquire astir margin. So I mean, really awesome to spot what you guys printed successful nan margin. I mean, looking astatine nan numbers for fiscal 2nd quarter. To me, nan 2 astir important levers were nan merchandise gross separator and nan income and trading benignant of costs that were moderated. I conjecture arsenic we deliberation astir nan remainder of nan year, really should we exemplary retired those 2 levers? So should we proceed to expect little incremental unit from proviso concatenation costs connected nan merchandise GMs? And really acold tin this S&M ratio go?

Nikesh Arora

Well, I think, Patrick, first of all, is Dipak made your life easier by giving you an operating separator guidance for nan year. So you don't person to interest astir nan constituent parts. So you tin conscionable look astatine nan full and person a awesome time. Save you immoderate modeling astatine Palo Alto.

So that notwithstanding, I deliberation betwixt Dipak and I, we've some said that -- I contemplated putting this successful our net script. I had a gathering pinch an investor. Dipak and I had a gathering for hours astir six months to 7 months ago. And they took america done nan brute unit of profitability and margins and separator description and semipermanent EPS for Palo Alto.

And nan different day, Dipak and I looked astatine each different and say, you cognize what, maturation is important, but maturation -- profitable maturation is moreover much important. And I'd say, there's a bid of programs that Dipak has been moving complete nan past six months, which see looking astatine gross separator crossed each of our products, looking astatine our walk crossed categories, looking astatine headcount.

So this is simply a sustained programme we person successful place. We're going to mean our measurement done it to make judge that we don't effect our expertise to make nan correct magnitude of maturation and correct magnitude of profitable growth.

But I think, nan point I'll time off you pinch is that, we've fixed nan guidance for nan afloat twelvemonth for operating margin, really it's going to evolve. We deliberation it's a very bully spot compared to wherever we were expecting to beryllium correct now. And I think, we've besides fixed you dream that we don't judge this is nan end. We judge we tin support improving from here. So for now, that's each we're going to say.

Patrick Colville

All right. Thank you, truthful much.

Clay Bilby

All right. Next, we've sewage Matt Hedberg of RBC followed by Jonathan Ho. Go ahead, Matt.

Matt Hedberg

Cool. Thanks, guys. Congrats from maine arsenic well. Nikesh, I person to spell backmost to SASE. I mean nan 50% maturation successful ARR disconnected of a ample guidelines is impressive. And you guys took a different attack this twelvemonth successful position of integrating your halfway firewall and your SASE income force.

Can you talk astir nan strides successful those conversations into nan different benignant of 50,000 firewall customers that aren't SASE customers? How does that chat go? And if -- conscionable because it feels for illustration specified a matrimony that makes truthful overmuch consciousness from a cross-sell perspective?

Nikesh Arora

Yes. Matt, look, I deliberation a happy firewall customer is simply a customer who astatine slightest has a bully emotion astir Palo Alto. And I think, if they've deployed our information services, they're moreover better, because they cognize really those information capabilities work. And now we're moving though each of these customers to trying to activity pinch them connected their Zero Trust strategy.

SASE is mostly a agelong lead time, agelong conversation, because it's not conscionable security. I deliberation nan portion which sometimes gets mislaid successful this -- successful immoderate of nan analysts, is that SASE is really -- you're taking -- say, nan firewall, I springiness you a firewall, you tally nan firewalls successful your network, it's each good. You tally your increasing product.

In SASE, I tally your network. I return nan postulation from your laptop onto me, connected to GCP, and way nan postulation for you. So now I'm portion of your mission-critical capabilities. That intends my web has to beryllium strong, my latency has to beryllium low, my readiness has to beryllium high. That's not a accepted mobility information CoIP companies person been asked. They're not utilized to moving networks.

That's why I conscionable autumn disconnected my chair erstwhile I support hearing, location are 7 different vendors building SASE solutions. I'm like, yes, bully luck, study really to tally a network. So there's nary coincidence that we decided that we were not going to tally nan network. We're going to fto AWS and GCP tally nan web for us, because that's what they do really well. And they person unreality capacity pinch debased latency.

So we've built our SASE stack, which runs now concurrently connected GCP and AWS, allowing america to springiness you availability, which is higher than those 2 individually. So we deliberation successful nan agelong term, that's nan correct answer, right?

Now, clearly, we're not 11 years aged successful SASE. We're 3.5 years aged successful SASE. So location are immoderate things which we’ll get stumped on, because location are features and capacity we request to support building, because location are separator cases which had been brought to nan forefront.

That's wherever Lee and his squad are doing a phenomenal job, continuing to support america astatine nan apical of nan benignant of pyramid of that topic. We're moving connected immoderate really breathtaking capabilities successful nan upcoming future. We'll pass you successful nan adjacent upcoming quarters. But we consciousness very bully astir our SASE pipeline, our connected ramp. They're lumpy. They're ample deals. But location is merchandise marketplace fit, and we're seeing success.

Clay Bilby

All right. And our adjacent mobility from Jonathan Ho of William Blair followed by Saket Kalia. Go ahead, Jonathan.

Jonathan Ho

Congratulations. Just wanted to possibly commencement out, you've seen immoderate tremendous ample woody occurrence this quarter. In position of nan level consolidation discussions pinch customers, what are you seeing? And is location grounds of customers possibly standardizing connected Palo Alto crossed aggregate areas? What could thrust that benignant of inclination complete time? Thank you.

Nikesh Arora

So William, nan logic we showcased nan millionaire customers, nan $5 cardinal deals and nan $10 cardinal woody slide, is there's a journey. By nan way, I'm going to nonstop you a Palo Alto shirt, truthful you tin astatine slightest deterioration that successful this meeting. You tin deterioration that different 1 different times. But anyway, truthful yeah, we showed you a descent of $1 cardinal and $5 cardinal and $10 cardinal because customers spell done a journey. And it's very seldom you locomotion into a caller customer, and we convinced them to spell walk tens of millions of dollars to this and consolidate. So it's usually an evolutionary process wherever we've go nan firewall vendor of choice. They spell pinch america connected SASE. They're moving connected cloud. They spot nan concurrence of unreality and SASE. They person XDR. They want to get to XSIAM.

So slow and steadily, we are showing them nan benefits of consolidation. I'll show you, america being leaders successful 13 categories helps because nan first clip you utilized nan connection consolidation, nan first guidance of nan CIO aliases CISO is, hold a minute, I want nan champion stuff. I conscionable don't want it because you person it. Then we say, hold a minute, our worldly is nan champion up arsenic good arsenic it useful together. So it's a journey. It is not thing that is simply a panacea that each customer comes successful and walks in, but our teams are now focused towards trying to germinate our customers down that way aliases crossed that journey, right? And that's why we tin spell retired and do a deal. I deliberation our largest woody this 4th is northbound of $75 million.

Clay Bilby

All right. Our adjacent mobility from Saket Kalia of Barclays followed by Joe Gallo. Go ahead, Saket.

Saket Kalia

Okay. Great. Hey, guys. Thanks for fitting maine in. Numbers speak for themselves, Nikesh. Maybe a mobility for you. A batch of excitement astir XSIAM. Some absorbing wins you called retired arsenic good successful your AI section. But possibly a strategical mobility for you. As you deliberation ahead, possibly nan adjacent mates of years for XSIAM, really do you deliberation that, that will person started to disrupt nan SIM market, either from a tech aliases a pricing perspective? And possibly conscionable to flip that connected its caput a small bit, is it imaginable that devices for illustration XSIAM possibly thief grow nan SIM market?

Nikesh Arora

So I think, Saket, nan SIM marketplace doesn't person a pricing problem. It has a worth problem. I walk a batch of money. I don't get capable value. And if you inquire immoderate of nan customers retired there, really do they usage nan SIM, SIM is utilized post-breach aliases post-event to fig retired what happened. A SIM is not doing on-the-fly real-time blocking. So erstwhile SolarWinds happens, Log4j happens, you tin spell to your SIM and look astatine wherever it happened and fig retired and trace it backmost and effort and artifact nan whole. What it won't do for you is extremity it mid-flight. And that's a paradigm displacement arsenic acold arsenic information is concerned. The only measurement you tin do that and extremity it mid-flight is analyzing information arsenic it's being created.

So to us, nan logic we telephone XSIAM not SIM is here's our words. We watch nan information successful flow. We watch it coming from nan endpoint. We transverse correlate mid-flight pinch firewall data. We spell and triage it. We automate immoderate of nan alert, immoderate of nan sound away. And we're looking astatine for illustration existent incidents betwixt triage already, which are not being put successful immoderate ample information reservoir and past moving query connection against to spot really do I lick nan problem. They're already doing it successful nan backmost end.

Now of course, pinch nan readiness of caller LLMs that are retired there, which you each I'm judge person been talking astir and dealing pinch successful their free time, they do a batch much useful things than constitute poesy for your wife. They tin really analyse information to show you what is anomalous and what is disconnected pattern. And if you tin fig that out, past what do you person to do? You person to spell up and remediate it. How do you remediate it? You sewage to beryllium a firewall to remediate a network. You've sewage to beryllium an endpoint to remediate nan endpoint. You sewage to beryllium Prisma Cloud, remediate it successful nan cloud.

So I deliberation what XSIAM is going to do is going to bring real-time capacity successful nan SOC, aliases real-time capacity successful security. It's early days. Again, I'm going to opportunity – support repeating, estimation doesn’t spoil nan prayer, don't get up of itself, but this is wherever we're heading. And if you tin image chat ChatGPT 10 years from now, image AI and information 10 years from now. You will not person humans trying to analyse because it'd beryllium excessively difficult for humans to analyse petabytes of data. Already, nan information successful an statement is excessively overmuch for a information expert to analyze.

Clay Bilby

All right. Great. Next mobility from Joe Gallo of Jefferies, followed by Ben Bollin of Cleveland. Go ahead, Joe.

Joe Gallo

Hey, guys. Thanks for nan question. Can you conscionable remark connected nan execution successful unreality information contempt nan backdrop of hyperscaler maturation moderation? And past possibly much importantly, wherever customers are successful nan travel to unreality information consolidation? It still feels for illustration nan Wild West of a batch of disparate products successful that category. When does that marketplace merge, which I'd ideate benefits to? Thanks.

Nikesh Arora

Thanks, Joe. So 2 speedy answers. One, we're still nan largest subordinate pinch northbound of 2,000 customers successful unreality security. I don't know, if you explicitly called it out, but our largest unreality information was $40 cardinal this past quarter. I don't cognize immoderate different vendor successful nan unreality information abstraction who's doing half of that successful a 4th successful 1 deal. So yes, location are galore mini players retired there, but we've seen a spot of churn successful nan marketplace wherever immoderate mini players person benignant of been acquired and gone.

Does that mean we'll beryllium nan only player? No, there'll beryllium different players successful nan mean term, but we consciousness comfortable that location are group who are consolidating. It feels for illustration nan Wild West because customers are still not afloat successful nan afloat unreality information level mold. So they've not afloat embraced nan request to person each these things connected, but I deliberation it's a matter of clip and a matter of objection that it's going to happen.

In position of your mobility astir wherever we are, and we talked astir that successful nan prepared remarks astir hyperscalers. Remember, nan unreality information marketplace is simply a fewer cardinal dollars. The hyperscalable marketplace hundreds of billions of dollars. Now nan quality is erstwhile you perpetrate to a hyperscaler, you perpetrate that you're going to move, you're going to transition, you walk a batch of money. And a batch of that worldly sits successful deferred gross because they are not afloat deployed, aliases customers haven't afloat consumed.

Cloud information applies to worldly that you consume, right? Like, if you haven't consumed it, aliases you aren't fresh to devour it, they're not going to beryllium buying unreality security. So I deliberation we person a small spot of a spread successful position of erstwhile group perpetrate to erstwhile they deploy it, to erstwhile they return unreality security. I conscionable deliberation nan – that worldly tin slow down for a while, but it's still sewage – there's a batch of headroom for america to get from wherever we are. Even, if we sewage to each nan customers who are successful deployment aliases are deployed, I deliberation we should spot a dependable continued maturation for Prisma Cloud.

So nan marketplace demand, to me, is not wherever nan situation is. The situation for america aliases nan opportunity is to spell person arsenic galore customers arsenic we tin that this is simply a level play. You person to consolidate crossed aggregate modules. You person to person worldly talk to each different connected a changeless basis, otherwise, you extremity up successful nan aforesaid business arsenic you were successful endeavor information galore --.

Clay Bilby

Our past mobility coming is from Ben Bollin of Cleveland Research. Go ahead, Ben.

Ben Bollin

Good afternoon, everyone. Thank you for taking nan question. Nikesh, you've talked astir immoderate GSI opportunities successful nan past. I'm willing successful really you spot that transmission developing? What type of tail you spot there? And really meaningful your level is becoming for those partners? Thanks.

Nikesh Arora

Thanks, Ben. I utilized to opportunity that, astir a twelvemonth agone that, I've had much CIO conversations successful a 4th than I did successful galore years. I'd now opportunity that astir GSIs. I'd opportunity successful nan past six months, I've had much GSI conversations than I had successful nan first 5 years of Palo Alto, aliases 4 and a half years of Palo Alto, right? And nan logic is GSIs are willing successful transformation. They're willing successful wherever they tin spell into a customer and deploy a overmuch amended information result for them. We were not applicable arsenic a firewall institution pinch SASE, pinch unreality security, pinch now XSIAM, they spot a existent opportunity to spell successful and do immoderate translator for their customers. And translator for them intends gross to them and intends a coagulated merchandise successful nan back.

I'd opportunity astir GSIs are still early is successful their travel to build a afloat cybersecurity competency crossed nan board. And there, they'd alternatively woody pinch lesser vendors than more. So, america being leaders successful definite categories, plays into our spot and our expertise to partner pinch them. I deliberation you -- we are already, without specifically calling retired deals, location are galore deals wherever we are collaborated pinch GSIs, wherever they are nan front. We activity pinch them to beryllium arsenic portion of a larger translator project, and we're seeing much and much of that.

Clay Bilby

With that, we reason nan Q&A information of our telephone today. I'll move it backmost complete to Nikesh for his last remarks.

Nikesh Arora

Look, first of all, I want to convey each of you for joining our call. I besides want to convey our employees, who activity really difficult towards delivering these results. I person to opportunity six months ago, erstwhile we've started to spot informing signs, we pivoted hard. We made judge that our teams sewage up of it, and they person delivered. So, I want to convey each of them for their contribution.

As I said, this is this is simply a challenging macro situation retired there. And nan only measurement we're going to get done this arsenic Palo Alto Networks is to support our caput down and execute. And that's what we intend to do. Once again, convey you, guys and spot you adjacent quarter.

Editor: Naga



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